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How to Calculate Working Capital

Your working capital is $50,000.00 on $150,000 of current assets and $100,000 of current liabilities — the business holds $1.50 of short-term assets for every $1.00 of short-term bills, $25,000.00 short of a $75,000 target. This guide works the calculation step by step: add up the assets, add up the liabilities, subtract, and check the result against the target — in 7 steps.

The formula

The working capital question is the business question in one number: after the bills due in the next year are paid, how much is left over to run the business. Take the business’s current assets — what it can turn into cash within a year — subtract its current liabilities, what it must pay within a year, and the answer is the working capital. A working capital of $50,000.00 means $50,000.00 is left after the short-term bills.

Step 1 — Add up the current assets

Start with what the business can turn into cash within a year: the cash in the bank, the accounts receivable, the inventory on the shelves and any prepaid expenses. Add them together — that is the current assets. Leave out the long-term assets. On the worked example the current assets are $150,000.00.

Step 2 — Add up the current liabilities

Now add up what the business must pay within a year: the accounts payable, the short-term debt and the accrued expenses. That is the current liabilities. Leave out the long-term debt. On the worked example the current liabilities are $100,000.00.

Step 3 — Subtract the liabilities from the assets

Subtract the current liabilities from the current assets. That is the working capital. On the worked example it is $150,000.00 − $100,000.00 = $50,000.00. The business holds $50,000.00 after its short-term bills — the cash cushion it has to fund day-to-day operations.

Step 4 — Work out the working capital ratio

Divide the current assets by the current liabilities. That is the working capital ratio, the same cushion as a multiple. On the worked example it is $150,000.00 ÷ $100,000.00 = 1.50. The business holds $1.50 of short-term assets for every $1.00 of short-term bills. Rounded to two decimals: 3.00 with $50,000.00 of liabilities, 2.00 with $200,000.00 of assets, and 0.90 with $90,000.00 of assets.

Step 5 — Work out the assets the target needs

Add the target working capital to the current liabilities to find the current assets the business must hold. On the worked example the target is $75,000.00, so the assets needed are $75,000.00 + $100,000.00 = $175,000.00. At the $100,000.00 target they are $100,000.00 + $100,000.00 = $200,000.00, and at the $25,000.00 target they are $25,000.00 + $100,000.00 = $125,000.00.

Step 6 — Work out the most liabilities the target allows

Subtract the target working capital from the current assets to find the most current liabilities the target allows. On the worked example it is $150,000.00 − $75,000.00 = $75,000.00. At the $50,000.00 target it is $150,000.00 − $50,000.00 = $100,000.00, and at the $100,000.00 target it is $150,000.00 − $100,000.00 = $50,000.00. This is how a lender sizes the room.

Step 7 — Check the result against the target

Compare the working capital with the target: on the worked example the working capital is $50,000.00 and the target is $75,000.00, so the business is $25,000.00 short. Check it: $50,000.00 + $100,000.00 = $150,000.00, the current assets, and $175,000.00 − $100,000.00 = $75,000.00, the target. One warning: the reverses are exact on whole dollars — at $174,999 the working capital is $74,999.00, $1 short of the target.

Three worked examples

The headline example: $150,000.00 of current assets and $100,000.00 of current liabilities. The working capital is $150,000.00 − $100,000.00 = $50,000.00, the ratio is $150,000.00 ÷ $100,000.00 = 1.50, and the current assets needed for the $75,000.00 target are $175,000.00. Current liabilities of $50,000.00 instead: the working capital is $100,000.00 and the ratio is 3.00. Current assets of $200,000.00 instead: the working capital is $100,000.00 and the ratio is 2.00. Use the working capital calculator for your own numbers.

Two reverses to check your answer

The smallest whole-dollar current assets for the working capital to reach $75,000 is $175,000 — at $175,000 the working capital is $75,000.00, and at $174,999 the working capital is $74,999.00 — $1 short. The largest whole-dollar current liabilities for the working capital to STAY at or above $75,000 is $75,000 — at $75,000 the working capital is $75,000.00, and at $75,001 the working capital is $74,999.00.

What counts as current assets, and what does not

Current assets are what the business can turn into cash within a year: cash, accounts receivable, inventory and prepaid expenses. The trap is the receivables: the working capital counts them at face value, but bills that never get paid are not cash, and a lender will discount them. Long-term assets stay out — the building and equipment are not due in the next year, and they cannot pay the next month’s rent.

What counts as current liabilities, and what does not

Current liabilities are what the business must pay within a year: accounts payable, short-term debt and accrued expenses. The supplier’s invoice, the credit-card balance and the wages owed are all current liabilities. Long-term debt stays out — a mortgage or a five-year loan is not due in the next year. The trap is the part of the long-term debt that falls due this year: that slice is a current liability, even though the loan itself is not.

Why working capital matters

Working capital is the cushion between the business and its bills. Positive working capital means the business can cover its near-term obligations and fund day-to-day operations — pay the suppliers, make payroll, keep the lights on. Lenders and suppliers watch it alongside the current and quick ratios before extending credit, because a business that cannot pay its short-term bills will not survive long enough to repay a loan. Too much working capital can mean idle cash sitting on the balance sheet; too little means fragility at the first slow month.

What to do below target

A working capital below target means the cushion is thin. On $150,000.00 of current assets and $125,000.00 of current liabilities the working capital is $25,000.00 — $50,000.00 short of the $75,000.00 target. The fixes are the formula’s two levers: raise the current assets or cut the current liabilities. Collect receivables faster, put in cash, sell slow inventory, or pay down short-term debt. The smallest whole-dollar current assets that reach $75,000.00 are $175,000.00 — at $174,999 the working capital is $74,999.00, $1 short.

What negative working capital means

Negative working capital means the short-term bills exceed the short-term assets. On $90,000.00 of current assets and $100,000.00 of current liabilities the working capital is $−10,000.00 and the ratio is 0.90 — the business is leaning on future sales or borrowing to stay afloat. With $0.00 of current assets the working capital is $−100,000.00. A business can survive it for a while — if it collects cash before it pays its suppliers — but it has no cushion at all.

How working capital differs from the current ratio and the quick ratio

The current ratio is current assets divided by current liabilities — the same cushion as a multiple. The quick ratio takes the inventory out first. On the worked example working capital is $50,000.00, the current ratio is 1.50, and the quick ratio on the same numbers with $40,000.00 of inventory is 1.10. Working capital is the dollars left over; the current ratio is the multiple; the quick ratio asks whether the bills are covered if nothing sells.

Frequently asked questions

What is working capital?

Current assets minus current liabilities. On $150,000.00 of current assets and $100,000.00 of current liabilities working capital is $50,000.00 — the cash cushion a business has to pay its short-term bills and fund day-to-day operations.

How do I calculate working capital?

Subtract the current liabilities from the current assets. Take the current assets — cash, accounts receivable, inventory and prepaid expenses — and subtract the current liabilities — accounts payable, short-term debt and accrued expenses. On $150,000.00 minus $100,000.00 that is $50,000.00.

What is a good working capital?

Positive, and enough to cover the bills. A working capital of $50,000.00 with a ratio of 1.50 means $1.50 of short-term assets for every $1.00 of short-term bills. Negative working capital means the short-term bills exceed the short-term assets.

How much in current assets do I need for $75,000 of working capital?

$175,000 on $100,000 of current liabilities. The assets needed are the target plus the liabilities: $75,000.00 + $100,000.00 = $175,000.00. At $174,999 the working capital is $74,999.00 — $1 short.

What does negative working capital mean?

The short-term bills exceed the short-term assets. On $90,000.00 of current assets and $100,000.00 of current liabilities the working capital is $−10,000.00 and the ratio is 0.90 — the business is leaning on future sales or borrowing to stay afloat.

How is working capital different from the current ratio?

Working capital is dollars; the current ratio is a multiple. On the same numbers working capital is $50,000.00 and the current ratio is 1.50 — the ratio says $1.50 of assets for every $1.00 of bills, and the working capital says how many dollars are left over. The quick ratio strips out inventory first.

Related calculators

Working Capital CalculatorWork out your working capital, the ratio, and the assets and liabilities the target allows.Current Ratio CalculatorWork out your current ratio, working capital, and the assets and liabilities the bar allows.How to Calculate Current RatioThe guide to working out a current ratio, step by step.How to Calculate Quick RatioThe guide to working out a quick ratio, step by step.